Alcatel-Lucent anxieties

Steven Hartley/Ovum
02 Aug 2007

Although Alcatel-Lucent has continuously stated that performance will improve in the second half of the year, today's announcement fell short of estimations and was not accompanied by guidance for the year.

The key issue remains that not enough revenue is being delivered into the business. Even the adjusted results provided today, which hid the merger and restructuring costs, were weak. Simply combining Alcatel's and Lucent's reported revenues for the same period last year generates total revenues of 5.08bn, 24% higher than today's figure.

Combining net income for the same period would have seen a figure of EUR243m, 22% higher than today. Such figures certainly call into question the benefits of combination.

There are signs that underlying growth is returning. CEO, Pat Russo, made much of quarter-on-quarter improvements in the business, implying that steady improvement will continue this year. This is true, with revenues up 13% overall and all units reporting improvements - but the Q1 results were hardly a strong benchmark!

Of the business segments, Carriers remained the largest by far and the wireline business group showed strongest growth, up 7% year-on-year and 18% on the quarter. However, wireless remains an area for improvement, with year-on-year revenues down 8%, but a quarterly improvement of 4%. Interestingly, Services saw the strongest growth, albeit from a smaller base. Revenues were up 11% on Q2 2006 and 26% on Q1 2007 to EUR750m. There are clearly opportunities here, although it would be remiss to call it a replacement for the Carrier segment in the short-term.

The results are also further evidence that the merger has provided the scale and cost savings desired. A further headcount reduction of 1,900 was reported in Q2, matching the figure in Q1 and taking the total in six months to 30% of its three-year target. It also reported that it was on track to meet the EUR600m cost savings predicted for this year.

However, much hard work lies ahead to continue the building process. Alcatel-Lucent is facing tough times and needs to sell more, but at the same time balance that with ever greater efficiency - a very tall order. The share price fell as the result was announced, although to be fair it is still too soon to say whether the merger has been successful. We noted at the time of its Q1 results in April that investors were increasingly anxious about Alcatel-Lucent's performance. These figures will not have helped to calm nerves.

Steven Hartley is a senior analyst focused on analysing the telecoms market for Ovum's EuroView service

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